How J.C. Penney Is Killing Itself

Brendan Byrnes, The Motley Fool

Published 12:00 pm, Sunday, March 31, 2013

In the following video, we speak with Roger Martin, strategy expert and dean of the Rotman School of Management at the University of Toronto. We discuss what Martin believes is J.C. Penney's fundamental strategic flaw, the fact that it's competing against itself with the new "store within a store" concept, and why he believes the company is doomed to fail.

A transcript follows the video.

The full interview with Roger Martin can be seenhere, in which we discuss a number of topics, including Bill Ackman, innovation, corporate responsibility, executive compensation, and how to pick out great companies. Martin is the co-author of Playing to Win, a new book focusing on strategy, written with former Procter & Gamble CEO A.G. Lafley.

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Brendan Byrnes: You know a thing or two about strategy, having helped turn around Procter & Gamble. I wanted to ask you about Bill Ackman and J.C. Penney. You wrote in a blog post recently that "Bill Ackman shows almost no evidence of understanding enough about strategy to turn around a company." What's he doing wrong?

Roger Martin: Well, I think he understands a whole lot about capital markets and a whole lot about how to make investors happy, but I'm not sure he knows how to make consumers -- customers -- happy in a way that brings about competitive advantage.

What I see with J.C. Penney is sort of a fallacy that I see often in the strategy of companies, which is that it's good enough to try to improve things. It's not. Improving is good, but only in the context of having a goal to have an advantage against competitors with some set of customers so that customers say, "I need this company."

If you just improve a company, you say, "I'm going to get their inventory turns up, or their sales per square foot up." That ends up often disappointing. I think that's, in some sense, what's happening at J.C. Penney.

They just announced a huge fourth-quarter loss. Same-story sales were down almost 30% in 2012, but the focus has been on, "Oh, we've got the new J.C. Penney" -- 10% of the stores are this new store within a store, and it's double the sales per square foot of the rest of J.C. Penney -- "so as soon as we get the stores converted over to 100% of this our sales per square foot," which were 130 apparently, and are 260 within the little store-within-a-store new J.C. Penney, "everything will be fine."

But that begs the question, "Who are you competing against?" I would argue that right now, the new J.C. Penney is competing against and absolutely slaughtering an important competitor, and it's called the old J.C. Penney.

The only way that sales per square foot can be up in the new J.C. Penney, that 10%, by that much, and sales per square foot for the store overall are down that much, is what? They're taking huge, huge amounts of sales away from the old J.C. Penney.

In due course, once they've destroyed the old J.C. Penney and got its sales per square foot down to zero, they're going to have to start taking share from somebody else. What I don't see is evidence that they have that in their mind, which is, "How are we going to beat Macy's, Nordstrom, Target," all the companies that one way or another they compete against.

That's strategy, having a where to play, how to win against competitors other than yourself.

Byrnes: J.C. Penney definitely has a strategy problem. Even bigger than that, it just seems like with declining mall traffic it's kind of an industry problem to some extent, although some of the other guys are doing much better, obviously -- Nordstrom and Macy's, you mentioned.

Can J.C. Penney survive with the competition from those big boys, and can they turn it around based on strategy?

Martin: I think you can always have a strategy to win in a certain way in a certain place. This is a particularly tough one, but the key is that without a strategy. I think the turnaround is actually doomed to fail.